2014 will be good for emerging market equities: Mark Mobius

Thursday, January 02, 2014

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Mark Mobius Executive chairman of Templeton Emerging Markets Group at Franklin Templeton Investments sees industrial production picking up next year but believes that inflation will remain a worry for India.

The Indian economy is beginning to show signs of growth, says Mark Mobius, the US-born expert on emerging markets. But much will depend on the outcome of the general election and the reforms the winning political outfit is willing to implement. For 2013-14, Mobius expects India’s economic growth at about 5%, which he says isn’t bad. The executive chairman of Templeton Emerging Markets Group at Franklin Templeton Investments, also said in an interview that he sees industrial production picking up, but inflation remains a worry.

Edited excerpts:-

What is the outlook for emerging equities in the near term? Which are your favourite emerging market bets?

We believe that this coming year will be good for emerging market equities because the major fact is that the economic growth in emerging markets is about four times faster than in developed countries, the fact that all exchange reserves are very high in these countries and the debt to GDP (gross domestic product) levels of these EM (emerging market) countries are much lower. The combination of these factors means that we are very much into a sweet patch going into 2014. So, we believe that emerging market equities will do quite well going forward.
First country, of course, is China, because it is still growing at a very fast pace. Next country we think which would be quite interesting going forward would be India. With the political change taking place in India, we see hope for reform and change.
Third would be Brazil. It has gone through a big correction in the market and the situation now, with (the football) World Cup coming up, a lot of attention from the rest of world (will be on it). And we have to realize that Brazil will have an incredible advantage at this point forward.

What would you advise investors about India, considering that there is a risk if things go the other way round as far as the election is concerned?

I agree that there is a possibility of a hung Parliament, but I think one of the positives is that the parties—Congress and the BJP—seem to agree that reforms are needed and the approvals need to be speeded up for foreign investments.

Do you think the Indian economy is out of the woods? Do you think the worst is behind for the Indian economy for now?

Yes, I think India is out of the woods and is beginning to show growth signs. And as I said, once these reforms take place, it will be very, very good for the Indian economy. There’s no question about that. I think what is important is that we don’t look at the Indian economy as just one entity. We look at the various states in India. Some states are growing at a very high pace, some states are not growing at all. So, it depends on the individual state. But overall, I believe India is on the recovery path.
First of all, the decline in the rupee helps export very well. GDP (growth) this year, we are looking at almost 5%, which is not bad, and next year hopefully more than that. Industrial production is down, but I think it is going to pick up on the back of a weaker rupee. The only worry of course is CPI (Consumer Price Index inflation)—the inflation index is high and RBI (Reserve Bank of India), of course, wants to take action by raising interest rates.

How big is this risk for emerging markets at large and for India?

India has been too dependent on hot money, and domestic institutional investors have been staying away from the market.
I think the (US Federal Reserve’s) tapering news has been discounted by all markets. I don’t think the impact will be very big. We must remember that central banks around the world have been tremendous. They have been building their balance sheets to very, very high levels. They are all filled up with papers, mortgages and all kinds of bonds that they bought from the banks in order to liquefy the banks.
This situation means that central banks will want to continue with high printing of money, high release of more liquidity in order to achieve higher inflation. That, of course, is different from the situation in India, but in the US and Japan that is the goal. Therefore, it is very unlikely that if tapering comes, it will not be universal and Japan certainly is not going to taper. Europe is not going to taper. In the US, the size of the balance sheet of the Federal Reserve is already huge and money is still out there and most part is still not utilized.

What are you current favourite sectors in Indian equities and which specific stocks excite you, and why?

In India, the sectors that we like are of course anything that is export-oriented. It is an area that we have been focused on. Also, anything to do with consumers. We are interested in consumer stocks in India and in other countries around the world. We think there is an opportunity for the growth of the Indian consumer as you know their incomes are going up. There is also consumer banking, because at the end of the day, you see that consumer banking is not very penetrated. So, there is much more that can be done in that direction. So, these are sectors we are focused on.

Will you be able to name some stocks you like?

If you look at our portfolios, you will see that Tata Consultancy Services is the big one. We are looking at some consumer stocks, but I can’t give you the names yet. In addition, we are looking at stocks in the pharmaceutical area as well and in steel. As I mentioned earlier, with the weak rupee and if they are able to release more iron ore mining in India, steel stocks could do quite well.